Privatization and Risk Sharing: Evidence from the Split Share Structure Reform in China

43 Pages Posted: 18 May 2011

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Kai Li

University of British Columbia (UBC) - Sauder School of Business; Asian Bureau of Finance and Economic Research (ABFER); China Academy of Financial Research (CAFR); European Corporate Governance Institute (ECGI); Canadian Sustainable Finance Network (CSFN)

Tan Wang

University of British Columbia (UBC) - Division of Finance; China Academy of Financial Research (CAFR)

Yan-Leung Cheung

The Education University of Hong Kong

Ping Jiang

School of International Trade and Economics, University of International Business and Economics

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Date Written: September 14, 2010

Abstract

A fundamental question in finance is whether and how removing market frictions is associated with efficiency gains. We study this question using share issue privatization in China that took place through the split share structure reform. Prior to the reform, domestic A-shares were divided into tradable and non-tradable shares with identical cash flow and voting rights. Under the reform, holders of the non-tradable shares negotiated a compensation plan with holders of the tradable shares in order to make their shares tradable. We hypothesize that efficiency gains in terms of better risk sharing play an important role in the determination of compensation. We show that the size of compensation is positively associated with both the gain in risk sharing and the price impact of more shares coming on the market after the reform, and is negatively associated with the bargaining power of the holders of non-tradable shares and firm performance. Our study highlights the role of risk sharing in China’s share issue privatization.

Keywords: bargaining power, compensation ratio, price impact, risk sharing, share issue privatization

JEL Classification: G11, G12, G18, G32

Suggested Citation

Li, Kai and Wang, Tan and Cheung, Yan-Leung and Jiang, Ping, Privatization and Risk Sharing: Evidence from the Split Share Structure Reform in China (September 14, 2010). Available at SSRN: https://ssrn.com/abstract=1677178

Kai Li

University of British Columbia (UBC) - Sauder School of Business ( email )

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China Academy of Financial Research (CAFR)

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Canadian Sustainable Finance Network (CSFN) ( email )

Queens University
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Tan Wang (Contact Author)

University of British Columbia (UBC) - Division of Finance ( email )

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Canada
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China Academy of Financial Research (CAFR)

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Shanghai P.R.China, 200030
China

Yan-Leung Cheung

The Education University of Hong Kong ( email )

Department of Social Sciences
10 Lo Ping Road, Tai Po, New Territories
Hong Kong
Hong Kong

Ping Jiang

School of International Trade and Economics, University of International Business and Economics ( email )

10 Huixin Dongjie, Chaoyang District
Beijing, 100029
China
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+8610 6449 3993 (Fax)

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